As Boris Johnson flew to the Gulf this week to ask for more oil to replace supplies from Russia, he was accused by the Labor leader, Keir Starmer, of “going cap in hand from dictator to dictator”.
At the same time, a report produced by the International Energy Agency (IEA) underlined just how limited the options are for any economy seeking to replace Russian crude and other oil products.
It says global oil demand is projected to be nearly 100m barrels per day (bpd) this year, lower than previously forecast because of the shock to global growth caused by the war in Ukraine. Russia produces about 10m bpd and exports about half of that plus about 3m bpd of oil products. It is unclear, however, how much of that supply might now be at stake.
The IEA thinks that at least 1.5m bpd of oil and 1m bpd of oil products are likely to be lost from Russia, from April until at least the end of the year, as buyers either reject supplies voluntarily or do so to avoid breaching sanctions. It says: “These losses could deepen should bans or public censure accelerate.”
“In reality, no one country can plug the hole that Russia would leave in the market in the event of a global ban,” says Sophie Udubasceanu, global crude oil expert at energy market analysts ICIS. So where can the world try to source anything up to 5m extra barrels of oil a day?
Saudi Arabia and the UAE
It is no surprise that the Gulf should be the first stop on the UK prime minister’s itinerary. Saudi, with 2m bpd spare, and the United Arab Emirates with 1.1m bpd are the only two leading oil producers with immediate spare capacity to offset a Russian shortfall. As the IEA notes, however, they are so far “showing no willingness to tap into reserves”.
Both are members of the Opec + cartel of oil-producing countries, which meets again on 31 March to decide on output levels. Opec members agreed to raise output by a modest 400,000 bpd earlier this month, despite full knowledge of the Ukraine situation.
A Saudi / UAE increase including their spare capacity would “potentially lead to the demise of the Opec + cooperation”, says Saxo Bank analyst Ole Hansen, signalling such a move is unlikely.
He also points out that no oil producer would ever max out their spare capacity, the maintenance of which is an important price stabilizer and a buffer in case of unforeseen disruption.
The IEA reckons Iran has about 1.2m bpd of spare capacity in theory but there are some serious caveats. The first is the need for sanctions to be lifted, via a resolution in talks between Tehran and western economies about reviving the 2015 deal on Iran’s nuclear ambitions. Even then, the IEA says, it is likely to take another six months at least before 1m bpd from Iran could be factored in.
Iran has 100m barrels in floating storage that could be accessed quickly but it would take months to feed into the global supply chain.
Like Iran, Venezuela remains subject to US sanctions that would have to be lifted if its production was to increase. A return to 2015 output would mean an extra 1.8m bpd eventually but that would trickle through very gradually.
“A few hundred-thousand barrels would be the initial impact with a continued recovery likely to take years and billions of dollars of new investments,” says Hansen.
“US exports have been rising most of 2021, peaking in December at 3.45m bpd, when not threatened by hurricanes or power outages,” says Udubasceanu, who sees little chance of a rapid acceleration in that trend.
Hansen agrees, saying an extra 0.5m bpd could be added if US shale output were to return to its 2019 peak but that this would be held up by ongoing shortages of sand, truckers, fracking crews and rigs.
Nor would the uplift be fast. Rystad Energy, a research company, estimates an average time of eight months from spudding (starting) a new well to oil flowing to market.
Nigeria is still 0.4m bpd below its 2019 peak output, says Hansen. Restoring that level would require investment from major oil companies and greater political stability. The IEA also cites Canada and Argentina as potential contributors via their own US-style shale resources, but nothing that would move the needle. It does not even mention the North Sea in its assessment of alternative supply sources.